Recent New Jersey Insurance Decisions

Federal Judge Katherine Polk Failla of the Southern District of New York granted summary judgment in favor of Zurich American Insurance Company in connection with a contingent business interruption claim asserted by its insured, Lantheus Medical Imaging, Inc. The insured claimed that it sustained a contingent business interruption (“CBI”) loss in excess of $75 million as a result of the shutdown of the Chalk River Reactor, also known as the NRU Reactor, in Ontario, Canada.

Lantheus, a specialty pharmaceutical company that manufactures and distributes diagnostic medical imaging products, purchased Molybdenum-99 (“Moly-99”), a radioactive isotope produced by the reactor, from Nordion, Inc. The reactor was shut down for more than one year after a leak of heavy water was discovered. The heavy water leaked through two penetrations in the wall of the reactor vessel. After an extensive investigation, Atomic Energy of Canada Limited (“AECL”), which operates the reactor, determined that the loss was caused by corrosion.

In light of the AECL’s findings, Zurich denied coverage on the basis of a corrosion exclusion in the policy issued to Lantheus. The corrosion exclusion contained anti-concurrent cause language. Thus, if corrosion contributed to the loss, coverage was excluded “regardless of any cause or event that contributes concurrently or in any sequence to the loss or damage.”

Lantheus conducted extensive discovery of AECL in Canada in an effort to develop evidence establishing that the loss was caused by something other than corrosion. Lantheus also retained a corrosion expert who testified that the particular type of corrosion at issue, electrochemical cell corrosion, did not qualify as “ordinary” corrosion because it happened very rapidly. Therefore, according to the insured, the corrosion exclusion did not apply. The insured also argued that the final penetration of the reactor wall occurred as a result of a sudden surge of water in the vessel, which caused a drastic increase in pressure (i.e., a pressure transient). In other words, the “straw that broke the camel’s back” was a pressure transient and not corrosion.

The court rejected each of the arguments raised by Lantheus. In doing so, it noted that the term corrosion was not defined in the policy. Thus, it looked to the dictionary definition of the term:

Webster’s defines “corrosion” as “the action or process of corrosive chemical change not necessarily accompanied by loss of form or compactness; typically: a gradual wearing away or alteration by a chemical or electrochemical essentially oxidizing process (as in the atmospheric rusting of iron).”

The court rejected Lantheus’s argument that the exclusion applied only to corrosion damage that takes place inevitably over the useful life of a machine and, therefore, would not apply to the corrosion at issue. According to the court:

Nothing in the dictionary definition narrows the scope of “corrosion” to that which occurs “inevitably” over the life of a machine. Other courts have rejected analogous attempts to narrow the definition of “corrosion.”

The court also found that “rapid” corrosion falls within the exclusion. As noted by the court, “[i]mplicit in Lantheus’s argument is the notion that a ‘gradual’ process cannot also occur rapidly. This is not so. A ‘gradual’ process ‘proceed[s] by steps or degrees,’ but it does not necessarily do so slowly.” According to Lantheus’s expert, the corrosion at issue took place over a period of 29 days.

With respect to Lantheus’s contention that a pressure transient caused the failure of the vessel wall, the court “accept[ed] for the purposes of [the] motion that the breach occurred because of a ‘pressure surge . . . act[ing] upon an already weakened point.’” Judge Failla went on to note, however, that “in light of the anti-concurrent causation language, this theory simply begs the question of what process caused the vessel to be ‘already weakened.’” Because the court found that corrosion caused the “already weakened” condition of the vessel, there was no coverage.

The court likewise rejected Lantheus’s argument that the loss fell within the ensuing loss exception to the corrosion exclusion. It held that “the ensuing loss provision cannot be applied . . . to restore coverage for the loss caused by corrosion.” According to the court, Lantheus would be entitled to coverage under the ensuing loss exception only if it could prove that “collateral or subsequent” damage occurred to other insured property as a result of the excluded peril. Here, there was no evidence of any collateral or subsequent damage. “Even under Lantheus’s theory of the case, the aeration cell operated in tandem with the hydraulic transient to cause the through-wall breach — there was, therefore, no ‘ensuing loss.’”

Because it granted summary judgment to Zurich based on the corrosion exclusion, the court did not need to consider whether the shutdown of the reactor resulted in a “necessary suspension” of Lantheus’s business. It did note, however, that “the [policy] provisions suggest that Lantheus’s CBI coverage hinges on whether its business activities at the Billerica Facility ceased completely as a result of the NRU Reactor shutdown.” The court further noted that “[t]he majority of courts have reached the same conclusion when faced with this language.”